Andrew Coyne cuts through pseudo-economic arguments from Ottawa

[Tonington]

Coyne's article could also be called "Why is manufacturing so special?"

No good reasons for government handouts to corporations | Full Comment | National Post

In Coyne's excellent article, he highlights the pseudo-economic arguments advanced by former economists and our Government for propping up industries such as automobile manufacturing, and venture capital.

In the end, I think the reasons are easy enough to understand. Automobile manufacturing in Canada is in predominantly vote rich Southern Ontario. The Government getting into the venture Capital markets allows them to "pick the winners", or more plainly support industries which may help them politically.

This comes at a time when Ottawa has rolled back the SRED tax credits that were available to all companies that wished to invest in innovation and research and development. Now the government is picking favourites even more as if the fact that they already were requires them to do it even moreso-a fallacious argument that Coyne deals with-, which should be all the more galling when it comes from a Conservative party that purports themselves to be savvy with respect to market economics.

 

[Machjo]

It ticks me off that the government should be throwing money at the car manufacturing industry. But what party to vote for to oppose that when I think they all support it if I'm not mistaken.

 

[captain morgan]

In Coyne's excellent article, he highlights the pseudo-economic arguments advanced by former economists and our Government for propping up industries such as automobile manufacturing, and venture capital.

In the end, I think the reasons are easy enough to understand. Automobile manufacturing in Canada is in predominantly vote rich Southern Ontario. The Government getting into the venture Capital markets allows them to "pick the winners", or more plainly support industries which may help them politically.

I read some of the article early today.... Can't help but comment that Coyne omitted an important part of the analysis, that being the subsidies to mfgrs reaps significant returns in terms of the taxes that are collected from things like income tax and the simple benefits of having that money transacting through the system(s) and collecting even more taxes as it moves through.

Take this one step further in that there will also be a population that isn't receiving EI or welfare because of this injection... Sure, monies from social assistance/EI filters through the system (albeit in smaller quantities), but there is no income tax removed (ie tax free).

In terms of VenCap money, Coyne is right in saying that gvt is picking winners and losers, but the flip side to this argument is that gvt is now participating directly in the massive profits that are available through the VenCap industry... To a degree, I support this as there is a lot of investment dollars that originates outside of Canada and the profits are repatriated back to their nation of origin... Why not take a gamble on gvt making the $$ and ear-marking it for this society?

 

[Tonington]

I read some of the article early today.... Can't help but comment that Coyne omitted an important part of the analysis, that being the subsidies to mfgrs reaps significant returns in terms of the taxes that are collected from things like income tax and the simple benefits of having that money transacting through the system(s) and collecting even more taxes as it moves through.

So again, what makes manufacturing so special? Coyne didn't really do any analysis. He simply called unsophisticated arguments pseudo-economic. Subsidizing any industry is going to allow more economic activity to take place when the producers margins are artificially lowered.

In terms of VenCap money, Coyne is right in saying that gvt is picking winners and losers, but the flip side to this argument is that gvt is now participating directly in the massive profits that are available through the VenCap industry... To a degree, I support this as there is a lot of investment dollars that originates outside of Canada and the profits are repatriated back to their nation of origin... Why not take a gamble on gvt making the $$ and ear-marking it for this society?

We had a program that delivered tax credits to companies that wanted to spend money on innovation. Every company that worked within SRED was treated equally. Now they have changed the rules around to favour large corporations like the one I work for, and in place of the SRED tax credits that were rolled back have created venture capital funds which are picking where the funds go now.

This is decidedly anti-market, and more prone to political gaming. The government was already making money off the SRED tax credits, by exactly what you mentioned above. More investment allowed by the tax credits returned more money in tax revenue than the program cost the government to run it, and in a program that was not singling out sectors of the economy, let alone business entities.

 

[taxslave]

If the government had not propped up the car companies how would their executives have ever gotten their big bonuses or kept their share value up?

 

[55Mercury]

don't forget those hefty donations to their new favourite political party

 

[captain morgan]

So again, what makes manufacturing so special? Coyne didn't really do any analysis. He simply called unsophisticated arguments pseudo-economic. Subsidizing any industry is going to allow more economic activity to take place when the producers margins are artificially lowered.

Sectors like mfg and resources are what I call primary sectors in that they are less dependent on servicing existing capital, ie: service related sectors depend on dealing with people that already have money to spend.

We had a program that delivered tax credits to companies that wanted to spend money on innovation. Every company that worked within SRED was treated equally. Now they have changed the rules around to favour large corporations like the one I work for, and in place of the SRED tax credits that were rolled back have created venture capital funds which are picking where the funds go now.

Vencap will broaden the scope of opportunities and generally speaking, run very lean as to pick opportunities that stand a better than average chance of success in the short and medium terms.

This is decidedly anti-market, and more prone to political gaming.

I'd suggest that it is completely pro-market, although it is easily susceptible to political gaming

The government was already making money off the SRED tax credits, by exactly what you mentioned above. More investment allowed by the tax credits returned more money in tax revenue than the program cost the government to run it, and in a program that was not singling out sectors of the economy, let alone business entities.

Gvt will make significantly more from the vencap operations

 

[Machjo]

Well, I hope a few of us will drill their local candidates on that one next election and see if we can squeeze a promise out of them... sorry, bad joke. What's a promise worth with them?

 

[L Gilbert]

The backbone of an economy are the small- and medium-sized businesses. To forget that in favor of large businesses is foolish. At the very least, it simply encourages bad and lazy business practise in the large companies and sends a bad message to those small- and medium-sized businesses.

 

[Tonington]

Sectors like mfg and resources are what I call primary sectors inI do have bon that they are less dependent on servicing existing capital, ie: service related sectors depend on dealing with people that already have money to spend.

So if they are less dependent on investors injecting capital, then what is the rationale for more subsidy? More to the point, we haven't established yet that manufacturing cars produces more benefit than a new technology created by the communications sector for example.

Vencap will broaden the scope of opportunities and generally speaking, run very lean as to pick opportunities that stand a better than average chance of success in the short and medium terms.

I have no bones about venture capital. I do have bones on this change from equal funding opportunities to limited funding opportunities filtered by government selection of what opportunities will be pursued. There is nothing pro-market about politicians picking winners. That should be left to the managers of capital funds. The government was in the right arena before by encouraging spending on R&D in Canada with tax credits.

Gvt will make significantly more from the vencap operations

That's contentious.

 

[SLM]

So if they are less dependent on investors injecting capital, then what is the rationale for more subsidy? More to the point, we haven't established yet that manufacturing cars produces more benefit than a new technology created by the communications sector for example.

I say that probably it would be very difficult to establish that. Cars, as an example, is a proven commodity and it's benefits are known whereas new technology isn't.

I have no bones about venture capital. I do have bones on this change from equal funding opportunities to limited funding opportunities filtered by government selection of what opportunities will be pursued. There is nothing pro-market about politicians picking winners. That should be left to the managers of capital funds. The government was in the right arena before by encouraging spending on R&D in Canada with tax credits.

That's contentious.

I do agree with you about the R&D tax credits though as it encourages innovation and the market will determine the rest.

 

[captain morgan]

So if they are less dependent on investors injecting capital, then what is the rationale for more subsidy? More to the point, we haven't established yet that manufacturing cars produces more benefit than a new technology created by the communications sector for example.

I didn't articulate myself properly.

Getting to the rationale issue; there are a few fundamentals here including that the infrastructure, facilities, etc are already in place (for the most part). That is a big cost and to not take advantage of it is wasteful in itself. Add in that these are relatively high paying jobs compared to national averages and the loss of them hit society three times in the form of a high EI payout, the absence of income taxes on those wages and the notion that this money is not transacting through the local economy.

The new tech is great, but I would leave that to the private sector in that it is also capital intensive from an R&D perspective, possibly requires facilities/infrastructure and highly risky.

I have no bones about venture capital. I do have bones on this change from equal funding opportunities to limited funding opportunities filtered by government selection of what opportunities will be pursued. There is nothing pro-market about politicians picking winners. That should be left to the managers of capital funds. The government was in the right arena before by encouraging spending on R&D in Canada with tax credits.

In many ways, SRED is also picking winners in the manner that certain industries are not likely to receive the benefits

That's contentious.

We'll have to wait for a few years and see what kind of results that the program generates

 

[Tonington]

I say that probably it would be very difficult to establish that. Cars, as an example, is a proven commodity and it's benefits are known whereas new technology isn't.

But the fund is for innovation. This isn't a subsidy to build more of the same cars. As an example of innovative technology, how would you rate electric vehicles on the return they have delivered thus far? I'm one of few on here that would probably say this is a good technology worth developing, but I wouldn't use targetted subsidies like this. I would prefer indirect subsidies like tax credits, not a gift of cash, and then the market still gets to choose which of the disruptive technologies, if any at all, survive. They would still have to sell these new cars to get the tax credits...

And if we go down the road talking about well paying jobs lost and the infrastructure in place, we're right back to what Coyne said, it's not an economic argument. That would mean we acknowledge that the industry cannot survive on it's own, thus tax payer gifts amount to giving money to an economic loser as already picked by the market. If they cannot innovate and keep up with the current market trends, then why should we throw money to a contracting industry instead of improving conditions that allow smaller companies to grow?

It's not justified economically. It is politically...

 

[captain morgan]

But the fund is for innovation. This isn't a subsidy to build more of the same cars. As an example of innovative technology, how would you rate electric vehicles on the return they have delivered thus far? I'm one of few on here that would probably say this is a good technology worth developing, but I wouldn't use targetted subsidies like this. I would prefer indirect subsidies like tax credits, not a gift of cash, and then the market still gets to choose which of the disruptive technologies, if any at all, survive. They would still have to sell these new cars to get the tax credits...

SRED tax credits are also reliant on revenue in order to have a benefit to the end user

And if we go down the road talking about well paying jobs lost and the infrastructure in place, we're right back to what Coyne said, it's not an economic argument.

Just because Coyne says it isn't an economic argument does not make it so.

Going back to the above, scenario on electric cars, you still need a plant. property, equipment and skilled labor to execute the project. Any group that is willing to spend that money will strongly scrutinize these issues along with community infrastructure, transportation/access issues in addition to cost of doing business and tax environment.

At any rate, I still believe that Coyne is wrong simply based on the fact that it will be cheaper for gvt to keep these people employed as opposed to letting the facilities, etc go to 'seed', payout EI and have the local Timmy's, burger joint and movie theater go titters because the primary business in the community closed their doors.

That would mean we acknowledge that the industry cannot survive on it's own, thus tax payer gifts amount to giving money to an economic loser as already picked by the market. If they cannot innovate and keep up with the current market trends, then why should we throw money to a contracting industry instead of improving conditions that allow smaller companies to grow?

In my view, if the industry can't stand on it's own, it should be let go - however, this statement is tempered by also understanding that economic cycles can have an impact on the profitability of these businesses.

It's not justified economically. It is politically...

I see it both ways and arguments can be made for either decision

 

[SLM]

But the fund is for innovation. This isn't a subsidy to build more of the same cars. As an example of innovative technology, how would you rate electric vehicles on the return they have delivered thus far? I'm one of few on here that would probably say this is a good technology worth developing, but I wouldn't use targetted subsidies like this. I would prefer indirect subsidies like tax credits, not a gift of cash, and then the market still gets to choose which of the disruptive technologies, if any at all, survive. They would still have to sell these new cars to get the tax credits...

And if we go down the road talking about well paying jobs lost and the infrastructure in place, we're right back to what Coyne said, it's not an economic argument. That would mean we acknowledge that the industry cannot survive on it's own, thus tax payer gifts amount to giving money to an economic loser as already picked by the market. If they cannot innovate and keep up with the current market trends, then why should we throw money to a contracting industry instead of improving conditions that allow smaller companies to grow?

It's not justified economically. It is politically...

Sorry for the confusion, I was speaking just as a direct comparison of an established product, even an innovative one, to a completely new technology. Building a better mousetrap, as innovative as it might be (bigger, stronger, faster) we know what the benefit is to the end user. We can only guess with truly new technologies and products.

I do prefer a more open indirect subsidy like the tax credit as you've said, because ultimately the market does control where the money goes. It's fair, it's impartial, it's based on the benefit to the consumer/end user as they have so determined it be. I'd like to see less direct government involvement for the most part, not more, in business and industry.

Having said that I don't have a problem with earmarking some federal funds for a direct capital investment in any innovation. But I do think the criteria for such an investment should be completely impartial and open to both new and established sectors alike. The stimulus subsidies that went into the automotive sector were, at the time, necessary because having them all fail at once would have been catastrophic. But using that rationale to continue to subsidize the same industry through innovation subsidies is wrong. How long can that possibly go on?

In short, I agree with you.

 

[Liberalman]

Coyne's article could also be called "Why is manufacturing so special?"

No good reasons for government handouts to corporations | Full Comment | National Post

In Coyne's excellent article, he highlights the pseudo-economic arguments advanced by former economists and our Government for propping up industries such as automobile manufacturing, and venture capital.

In the end, I think the reasons are easy enough to understand. Automobile manufacturing in Canada is in predominantly vote rich Southern Ontario. The Government getting into the venture Capital markets allows them to "pick the winners", or more plainly support industries which may help them politically.

This comes at a time when Ottawa has rolled back the SRED tax credits that were available to all companies that wished to invest in innovation and research and development. Now the government is picking favourites even more as if the fact that they already were requires them to do it even moreso-a fallacious argument that Coyne deals with-, which should be all the more galling when it comes from a Conservative party that purports themselves to be savvy with respect to market economics.

Since the auto pact is dead

Any province can set up their own car manufacturing company from design to production.